Purchasing a home is an emotional experience for most of us. Quite often, it's the culmination of much planning and a lifetime of savings, but not really with the expectation of generating a return out of the investment, unless it's a second home which can be rented out. Your home is likely to be the single investment where you divert the bulk of your money.
Most expats look at investing in a house in their home country in which to settle down after retirement. What happens to the money that went into purchasing such a house? The property might have accumulated considerable value in the real estate market, but obviously, if it is all that you have, you wouldn't want to sell it, would you? In effect, this means, you're sitting on dead equity. Your house doesn't make any difference investment-wise unless you sell it and compromise on the location and size of your next home.
The situation is different in Dubai where most people buy a home with the intention of selling it at some point in time. They expect certain investment growth, especially in the current market where prices are at attractive levels.
What really matters in either case is whether there is a possibility of leveraging the investment that went into your home — in other words, making your house work for you. But in order to do this, you must recognise your home equity and know how to tap it effectively.
So what exactly is home equity? It is the value of a home minus the outstanding mortgage or any other debt obligation against the property. The property's equity increases as the debtor makes payments against the mortgage balance, or as the property value appreciates.
The current mortgage market provides access to massive funds without the worry of exorbitant interest rates. In such a situation, it is possible to tap the mortgage market and invest any spare cash or savings you might have in other high return investment areas, such as bonds or stocks. Expats buying a property back in their home countries might even stand to gain tax advantages.
"Banks [in the UAE] are looking to gain more business through mortgages and as a result have lowered their interest rates accordingly. Credit is still tight but there is a definite appetite for the banks to lend and re-finance," says Mario Volpi, head of Residential Property for Cluttons Dubai, one of the leading property consultants in the region. It is also possible to utilise home equity to raise finance to buy another property or for home improvements, says Mario.
For those looking to buy homes specifically for investment, it is a good idea to identify locations yielding real estate equity growth. Despite the prevailing troubled global economic conditions, a number of areas stand out as attractive destinations for investors from the UAE. "The sovereign debt crisis in Europe and bleak growth prospects in the US has sent most asset markets tumbling; however the London residential market has continued to perform," says Tim Murphy, CEO of IP Global, which specialises in seeking out real estate investment opportunities.
According to global property consultancy Knight Frank, property prices in London climbed by 0.6 per cent during September, with annual growth standing at 11.4 per cent so far in 2011. "The number of transactions at the luxury end of the market has been steadily increasing, with exchanges rising by 38 per cent year-on-year. Overseas buyers have poured almost £6 billion (Dh34 billion) into the London residential market during the past 18 months as investors seek relative safe havens for their investments, in a process known as ‘flight to quality'," says Tim.
Another ‘safe haven' is New York, although it doesn't really match up to London. "New York is an economy within an economy, therefore proving attractive to foreign investors. This can be reflected in annualised growth of 6.1 per cent over the last 16 years."
The capital city of Malaysia, Kuala Lumpur, also stands out as a potential destination for investors from the UAE. Malaysia has continued its robust economic growth throughout the first half of 2011.
"The Malaysian Ringgit has continued to benefit from its economic growth and is expected to rise further against a basket of currencies based on speculation that global funds are expected to pump more capital into the country's assets," says Tim.
"After the Ringgit fell 7 per cent in September this year, partly as a result of the European debt crisis, the currency climbed back to the strongest level in more than a week, rising 1.2 per cent in the week to October 7. Such factors add to Kuala Lumpur's investment case," Tim concludes.
That said, despite potential capital appreciation and rental yields, overseas locations are off the radar for ordinary homeowners. For them, it is critical to know if the house they eventually stay in will have enough room for equity growth.
- Imagine buying a house for Dh800,000. You make a down payment of Dh160,000 and borrow Dh640,000. When you buy the house, your equity is the same as the down payment, which in this case is Dh160,000.
- Dh800,000 (home's purchase price) - Dh640,000 (amount owed) = Dh160,000 (equity).
- After five years, if you have paid down Dh360,000 of the mortgage debt, you owe Dh280,000. During the same time, let's imagine the value of the house has increased to Dh1,300,000. In such a situation, your equity is now Dh1,020,000.
- This is how it works: Dh1,300,000 (home's current appraised value) - Dh280,000 (amount owed) = Dh1,020,000 (equity).